Nowadays, many entrepreneurs find innovative ideas to do business and start their business journey in a short amount of time. People get very excited about launching their new business idea as quickly as possible. Many do not pay much attention to establish their business with a proper legal structure.
It is important to establish a strong legal structure when starting a business. Even the best of business ideas could fail if there is a lack of legal knowledge. Especially, new entrepreneurs may find ecommerce to be a complicated interplay between manufacturers, suppliers, ecommerce store owner, shipping provider, consumer and the government; ‘governments’ if selling to other countries or states(USA)
Every country has its own ecommerce laws and policies. Understanding the implications of all these laws is necessary for the well-being of your business and the protection of your customers.
In this article, we shall explore the main legal aspects for an ecommerce store.
DISCLAIMER: This article is for informational purposes only. This is not legal advice. Please contact professionals to get legal advice.
Register your business
The first step to establish a legal structure for your e-commerce business is registering your business under appropriate governmental authority. If you have an office in the country and warehouse in another country, you may need to register in both countries.
By registering your e-commerce business becomes a legal entity which will legally protect you if any of your customers, or competitors, decide to file legal action against you. It will also ensure that both your personal assets and those of your business, are legally secure.
Choosing a Name for your Business
Come up with a catchy and memorable name which it relates to your niche. The name should be easy to market, and it should not get you into conflict with other established trade names owned by other companies. This name should also be the name of your website. So do some research and choose the name creatively.
Choosing a Business Structure
While registering you need to register under a proper business structure. There are different structures like a Sole Proprietorship, LLC, Corporation, etc., You need to register under an appropriate structure because each structure requires different taxes, registration fee, and legal documents.
Sole Proprietorship – It means that you are a one-man show, so no need for any legal documents and no separate tax (Only personal tax). You just need a trade name to register. It also means that your personal assets are can be held liable for the debts and obligations of the business. It can be useful for a low-risk business, but for an ecommerce business, there are some risks involved.
Limited Liability Company (LLC) – It is the best option for an ecommerce business because it separates your business assets from personal assets. But it needs some legal documents, and there is a single business tax. This is the best structure to register your ecommerce business.
There are other structures such as ‘S’ ,‘C’ and ‘B’ corporations. When business matures, you’ll be able to move from one structure to another depending on the needs of your e-commerce business.
Choose which state to register(only for USA)
It not necessary to register your business in the same state you operate. Sales tax differs from state to state and running an office or warehouse may require some permits or license for specific neighborhoods. You have to make a strategic decision about which state, city, and neighborhood you choose to start your business in.
Registering in a state which has low sales tax rates will save your ecommerce business a reasonable sum of money.
Some of your suppliers (especially dropshipping) may require your Certificate of Registration to make a deal with you.
Open a Bank Account
Open a business account in a reputed bank, to receive or spend any money in your business. This account should be the registered name of your business. A business account helps you stay legally compliant and protected and provides benefits to your customers and employees. It is also required for tax purposes. Customers will make payments for orders to this account.
Getting a Federal Tax Number for your Business
To file your tax returns and to submit a business report you need a Federal Tax Number(USA) A.K.A employer identification number (EIN). It’s like a social security number for a business. You cannot submit your tax forms to either the federal or the state government without this number. It is required for every business whether you have employees or not and you can get it through an easy online application of your ecommerce business.
Countries other than the USA also have similar tax number required for business.
- Business Number or Tax ID – Canada (small businesses have an exemption)
- Australian Business Number (ABN) – Australia
Licenses and permits
Though general usage products do not require a license for selling, special products like Medical devices, healthcare supplements, etc., need specific licences. In the USA, there are different products which come under Federal license and State license. Based on what product you choose to sell you may need a specific license.
You may also require a license to have warehouses in some neighbourhood and states.
Sales Tax Permit
In many places, it is legal to collect sales tax without a valid sales tax permit. You can get it by applying online on the Department of Revenue’s website (of the state where you have registered) and register to get a Sales Tax permit for your business.
When you are selling to states other than the one where you are registered from, you will come across something called the Sales Tax Nexus. It varies in different states. You may need to outsource this sales tax process to a professional such as TaxJar.
Getting you Business Insured
Every business brings a level of risk attached to it. Ecommerce is not an exemption, but you can protect your business by getting your ecommerce business insured. To protect your business analyze all your risk factors and calculate your business worth. Then get insurance which covers all your risk factors.
You may think when you have setup your business correctly there is no need for insurance. What if someone with a false legal claim decides to sue you? Though their claim may not stand in court, you still need money to go to court. That’s where Insurance comes!
Some insurance for Ecommerce business are:
- General Liability – Covers some fundamental risks that come with running an ecommerce business.
- Product Liability – Covers the company if a product they sell causes bodily injury or property damage.
- Cyber Insurance – Protects your organization from lawsuits, fines, and penalties in case of a hacking attack or data breach.
- Property insurance – Protects properties that are owned by the business.
Proper Insurance coverage is a must before starting any business. Enquire business owners and mentors in your field for recommendations and find companies that Insurance companies that specialise in e-commerce such as FounderShield.
Finding the Right Payment Gateway
Payment gateways authorize the payment between the seller and the customer. They allow your ecommerce store to accept a credit card, debit card, net banking, internet banking payments from multiple banks and credit card companies.
There are different Payment gateways like Authorize.Net, PayPal, SecurePay, etc., Each has its own pros and cons like hosted or non-hosted, include anti-fraud features, or require transaction fees, termination fees, monthly fees or setup fees. Find out which serves your purpose well.
Mostly a single payment gateway is enough for a store. Having multiple payment gateways might give you a competitive edge over your competitors.
It could be better if your payment gateway is integrated into your ecommerce platform so that customers won’t have to leave your website to make the payment.
if you’re planning to accept non-traditional forms of payment such as cryptocurrencies like Bitcoin, then you may need to find a gateway that supports it.
The payment gateway you choose will not only affect the overall customer experience but also determine the natural workflow of your store. Of course, you don’t want a gateway that regularly creates problems for you and your customers.
Trademark, Patents & Copyrights
- Trademark – It is usually a “brand” or “logo” could also be a business name, a distinctive catchphrase, taglines or captions which legally differentiates a product or a service from all others. It serves to identify a specific company exclusively.
- Patents – It is a limited time exclusive right for an invention for making, using, or selling the invention as a product. If someone wants to make or sell the product you need the permission of the patent holder.
- Copyrights – It is a legal right that creators have over their works. It may include books, music, paintings, sculpture, and films, to computer programs, databases, advertisements, maps, and technical drawings. You need permission to reproduce the work.
If you are going to sell something distinctly exclusive you might want to apply for one of these. Sometimes you might even violate someone else intellectual rights. If you are selling someone else’s intellectual property in your ecommerce store, get their permission first before selling.
In an ecommerce store, the personal information about the customers is received and stored in a database. Data protection laws protect the customers from misuse of this personal information. You must build your store in a such a way that you provide privacy protection, data security, cyber security, confidentiality maintenance for your customers.
Data protection laws differ in countries, but in essence, they want the customer to choose,
- If they want their information stored or not.
- If they want their information to be erased, it should be done so.
- Their information can be used for marketing purposes only if they choose it.
- If you use trackers like cookies on your website, then customers must be notified.
EU has passed a law known as General Data Protection Regulation (GDPR) to protect the privacy of the people of EU. Read more to make your website GDPR complaint.
PCI (The Payment Card Industry Data Security Standard) is an information security standard for organizations. Choose a payment gateway which is PCI compliant and give your customers a secure, encrypted checkout experience, so that their payment details remain safe.
If you are selling an age-restricted product such as Vape, Alcohol, Fireworks, etc., You should have age verification tools on your website and make sure that children do not use your store.
Legal Documents for your Ecommerce Business
You need to have 4 essential documents for your ecommerce store. They are,
- Terms & Conditions -It covers all of the Terms & Conditions that a customer is bound by when they browse your store, sign up for an account, or buy an item.
- Warranty Policy and Guarantees – This policy outlines any default warranties that are included in the sale of your products, as well as any particular terms relating to warranties that your customers can purchase.
- Returns and Refunds Policy –A Return Policy outlines how your company handles unhappy customers. You have to cover how and why a product will be returned, who pays for the return and how a refund would be given.
Note that all the policies must be drafted in such a way that it is fair to the customer. Unfair customer policies will also be subjected to legal actions. So, it would wise if you hire legal professionals to draft these policies.
This article gives you the basic idea for starting an ecommerce business in compliance with laws and policies. Please note that this checklist is non-exhaustive, i.e., there may be other legal formalities required for your local authority. To start a business, contact law professionals who specialize in business. Make use of agencies are available online for help such as Legalzoom (USA).
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